Home Equity loans tend to be very similar to primary mortgages when it comes to the application and loan approval process. Key documents may include:
These requirements can vary slightly and some may be able to be retrieved as part of the online application process.
The amount of home equity is calculated by subtracting the amount owed on the home (current mortgage amount) from the home’s value. For a home with an estimated value of $300,000 and a current mortgage balance of $210,000, the equity in the home is $90,000.
First, the amount of equity in the home needs to be calculated. For a home with an estimated value of $300,000 and a current mortgage balance of $210,000, the equity in the home is $90,000. Next, we need to introduce the concept of loan-to-value or LTV. LTV is the total home loan obligation divided by the value of the home reflected in a percentage. From the previous example, the LTV would be $210,000 divided by $300,000 or 70%. When considering a home equity loan, most lenders will loan up to 80% LTV – meaning that the current mortgage balance plus the home equity loan cannot exceed 80% of the home value. Therefore in our example, the home equity loan amount could be $30,000 (10%). Here’s the equation: ($210,000 + $30,000)/$300,000 = 80%.
Home equity loans are known as second mortgages. This means that they are second in line to the primary home loan when it comes to lien status. In the event of a foreclosure, the primary home loan gets the sale proceeds to cover their loan amount and any remaining funds go to the second mortgage – the home equity loan.